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Driving into debt

The hidden costs of risky auto loans to consumers and our communities

A Report by U.S. PIRG Education Fund and Frontier Group
Written by R. J. Cross and Tony Dutzik, Frontier Group
Ed Mierzwinski and Matt Casale, U.S. PIRG Education FundDOWNLOAD THE REPORT

In much of America, access to a car is all but required to hold a job or lead a full and vibrant life. Generations of car-centric transportation policies — including lavish spending on roads, sprawl-inducing land use policies and meager support for other modes of transportation — have left millions of Americans fully dependent on cars for daily living.

Car ownership is costly and often requires households to take on debt. In the wake of the Great Recession, Americans rapidly took on debt for car purchases. Since the end of 2009, the amount of money Americans owe on their cars has increased by 75 percent.1 A significant share of that debt has been incurred by borrowers with lower credit scores, who are particularly vulnerable to predatory loans with high interest rates and inflated costs.

KEY FINDINGS

Americans owe more than $1.2 trillion on auto loans, the highest in U.S. history. Auto debt has grown 75% since the end of 2009.

More Americans carry auto debt than ever before, with the number of outstanding auto loans up by 39% since 2010.

The average loan term for a new car is 68 months, compared to a traditional standard of 48 months. Longer loan terms mean more money spent on interest, and more time spent “underwater” on a loan — owing more on the vehicle than it is worth.

Since the Great Recession, low interest rates and easy credit has fueled the rise in auto sales … and debt, particularly to borrowers with low credit scores. In 2016, lending to borrowers with subprime and deep subprime credit scores made up 26% of all auto loan originations.

Auto lenders — especially subprime lenders — have engaged in a variety of predatory, abusive and discriminatory practices that enhance consumers’ vulnerability. For example, Wells Fargo was penalized by the Consumer Financial Protection Bureau for charging more than half a million car loan customers for additional insurance they did not need.

As auto debt increased, new car sales surged between 2009 and 2016, which led to more cars on the road. From 2010 to 2016, the number of registered vehicles increased by 7.5%. During the same period, traffic fatalities and injuries rose, as did greenhouse gas emissions from transportation.

Americans in transit-rich cities spend less on transportation than those in more car-dependent metro areas. The average Houston metro area resident spends about $3,500 more on transportation each year than someone in the Seattle area, $4,600 more than someone in Chicago, and $6,000 more than someone in the New York City area.

Americans’ rising indebtedness for cars raises concerns for the financial future of millions of households. It also demonstrates the real costs and risks imposed by our car-dependent transportation system. Americans deserve protection from predatory loans and unfair practices in auto lending. Americans also deserve a transportation system that provides more people with the freedom to choose to live without owning a car.

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Owning a car is the price of admission to the economy and society in much of America.

Access to a vehicle is necessary to reach jobs and economic opportunity in much of the nation. Even in the nation’s most transit-oriented metropolitan area, New York City, only 15 percent of jobs are accessible within an hour by transit, as opposed to 75 percent within an hour’s drive.2 Other cities with less robust transit systems have even fewer jobs accessible via transit.

Auto dependence is the result of generations of public policy. Since 1956, highway spending has accounted for nearly four-fifths of all government investment in the nation’s transportation system.3 Meanwhile, the embrace of single-use zoning and sprawl-style development separates people from jobs and other necessities, making access to an automobile all but mandatory for the completion of daily tasks.

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Owning a car is expensive and drives millions of households to take on debt.

Transportation is the second-leading expenditure for American households, behind only housing.5 Approximately one hour of the average American’s working day is spent earning the money needed to pay for the transportation that enables them to get to work in the first place.6

More Americans carry auto debt, and they owe more on their loans, than ever before:

There were 113 million open auto loan accounts in the United States in the third quarter of 2018, up from 81.4 million in early 2010, a 39 percent increase.7

Currently, 85 percent of all new car purchases in the United States are financed, up from 75 percent in 2009. In addition, 53 percent of all used car purchases are financed, up from 46 percent in 2009.8

Americans owed $1.26 trillion on auto loans in the third quarter of 2018, an increase of 75 percent since the end of 2009.9

The amount of auto loans outstanding is equivalent to 5.5 percent of GDP — a higher level than at any time in history other than the period between the 2001 and 2007 recessions.10

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Auto borrowing varies by income, age and location across the United States.

Over the last decade, auto debt per capita has been growing fastest among the oldest Americans (those age 70 and older) and slowest among the youngest Americans (those aged 18 to 29). Auto debt per capita among those 70 and older increased by 73 percent between 2007 and 2017, compared with 16 percent among those 18 to 29.12 Americans aged 40 to 49 owe the most on auto loans per capita — an average of more than $7,000 per person.

Lending to residents of low-income neighborhoods has bounced back since the recession, with loan originations increasing nearly twice as fast for residents of low-income neighborhoods than residents of high-income neighborhoods since 2009.13

Residents of Texas owe far and away the most on auto loans per capita of any state in the country, with average auto debt of just over $6,500 in 2017.14

The loosening of auto credit after the Great Recession has contributed to rising indebtedness for cars, increased car ownership and reductions in transit use.

Auto lending rebounded from the Great Recession in part because of low interest rates (fueled by the Federal Reserve Board’s policy of quantitative easing) and a perception by lenders that auto loans had held up better than mortgages during the financial crisis. As one hedge fund manager noted in a 2017 interview with The Financial Times, during the recession, “[c]onsumers tended to default on their house first, credit card second and car third.”16

A 2014 report by the Federal Reserve found that a consumer’s perception of interest rate trends had as strong an effect on the decision of when to buy a car as more expected factors like unemployment and income.17

Low-income borrowers are particularly sensitive to changes in loan maturity according to a 2007 study, suggesting that the longer loan terms of recent years may have been an important spur for the rapid rise in auto loans to low-income households.18

A 2018 study by researchers at the University of California, Los Angeles, tied the fall in transit ridership in Southern California to increased vehicle availability, possibly supported by cheap auto financing.19

The rise in automobile debt since the Great Recession leaves millions of Americans financially vulnerable — especially in the event of an economic downturn.

Americans are carrying car loans for longer periods of time. Of all auto loans issued in the first two quarters of 2017, 42 percent carried a term of six years or longer, compared to just 26 percent in 2009.20 Longer repayment terms increase the total cost of buying an automobile and extend the amount of time consumers spend “underwater” — owing more on their vehicles than they are worth.

Many car buyers “roll over” the unpaid portion of a car loan into a loan on a new vehicle, increasing their financial vulnerability in the event of job loss or other crisis of household finances. At the end of 2017, almost a third of all traded-in vehicles carried negative equity, with these vehicles being underwater by an average of $5,100.21

The increase in higher-cost “subprime” loans has extended auto ownership to many households with low credit scores but has also left many of them deeply vulnerable to high interest rates and predatory practices. In 2016, lending to borrowers with subprime and deep subprime credit scores made up as much as 26 percent of all auto loans originated.22

Discriminatory markups of loans that result in African-American and Hispanic borrowers paying more for auto loans.25

Pushing expensive “add-ons” such as insurance products, extended warranties and overpriced vehicle options, the cost of which is added to a consumer’s loan.26

Engaging in abusive collection and repossession tactics once a consumer’s loan has become past due.27

Our recommendations

Americans should not face crippling debt or abusive practices in the marketplace to secure the transportation they need. By strengthening consumer protections for auto borrowers and expanding transportation options, local, state and federal governments can protect households from the financial vulnerability created by automobile debt.

To protect consumers in the automotive marketplace, policy-makers should limit abusive, predatory and discriminatory auto sales and lending practices including by: